Islamic banks as artificial persons operate under corporate law with limited liability, a structure that conflicts with Islamic jurisprudence. This analysis examines how artificial legal personhood, borrowed from capitalism, undermines Shari’ah principles of real ownership, liability, and valid contracting, raising fundamental questions about the legitimacy of modern Islamic banking.
Islamic bank as artificial person and the question of legal existence
Islamic bank as artificial person stands at the center of a largely ignored Shari’ah debate. Most discussions on Islamic finance concentrate on products, pricing methods, or contractual labels. However, these discussions bypass a more basic question. Can an institution that exists as an artificial legal person under corporate law claim legitimacy within Islamic jurisprudence at all?
Modern Islamic bank as artificial person operates as registered company. Corporate law grants them legal personhood, perpetual existence, and limited liability. As a result, these banks can own assets, enter contracts, and generate profits independently of their shareholders. At the same time, losses remain confined to paid-up capital, while personal liability stays legally sealed off. This structure defines the corporate entity regardless of whether the bank calls itself Islamic or conventional.
By contrast, Islamic jurisprudence constructs economic life around real persons, real intent, and real accountability. Every valid contract in Islamic law presupposes identifiable human actors who possess reason, freedom, and moral responsibility. Ownership and liability move together. Profit does not detach itself from risk. Therefore, legal existence in Islam does not arise from state registration but from human agency tied to responsibility.
Once an Islamic bank as artificial person adopts the framework of artificial personhood, a structural tension emerges. The institution earns profits, distributes returns, and absorbs risk in legal form. Yet it lacks intention, moral agency, and accountability beyond the courtroom. When failure occurs, dissolution replaces responsibility. Consequently, liability disappears where Islamic law would normally demand persistence.
For this reason, the issue facing Islamic finance is not whether interest is avoided in contractual form. Instead, the deeper concern lies in whether Islamic banks as artificial persons can satisfy the foundational requirements of Islamic jurisprudence. Until this question is addressed, debates over Shari’ah compliance remain incomplete.
How Islamic jurisprudence defines a valid economic actor
Islamic jurisprudence does not treat economic activity as a technical exercise detached from moral agency. Instead, it begins by defining who may act in the market and under what conditions responsibility arises. This framework matters because Islamic banks as artificial persons must satisfy these criteria before any discussion of compliance can carry weight.
Juristic Conditions for a Valid Economic Actor in Islamic Law
Classical jurists established clear conditions for a valid contracting party in matters of muʿāmalāt. First, the party must possess real existence. Contracts in Islamic law bind actual persons, not abstractions created by statute. Second, the party must have reason and discernment, because intent and consent rest on عقل, a point consistently emphasized in classical contract theory (https://www.lawteacher.net/free-law-essays/contract-law/requirement-for-valid-contract-to-shariah-law-contract-law-essay.php). Third, the party must be legally competent and free, meaning capable of bearing consequences that flow from ownership and action. Finally, the party must be able to sustain liability over time, since Islamic law does not recognize responsibility that disappears through procedural exit.
These conditions serve a precise purpose. Islamic law ties ownership, profit, and risk into a single moral chain. Whoever claims profit must also bear loss. Whoever exercises control must accept responsibility. This principle, expressed through maxims such as al-kharāj bi-al-ḍamān, prevents the separation of gain from accountability and anchors economic activity in moral responsibility, a theme widely recognized in Islamic commercial jurisprudence (https://en.islamonweb.net/an-overview-of-financial-transactions-in-islamic-fiqh-key-characteristics).
Islamic Bank as Artificial Person and the Breakdown of Moral Agency
By contrast, corporate law constructs economic actors differently. It recognizes an artificial legal entity that exists independently of its members. This entity can own assets, enter contracts, and accumulate profit. However, its liability remains capped by design. When losses exceed assets, the law permits dissolution. Responsibility ends at liquidation. Corporate personhood thus allows profit continuity without personal accountability, a feature central to modern company law but foreign to classical fiqh conceptions of obligation.
This divergence creates a fundamental problem for Islamic bank as artificial person claims. The artificial person satisfies procedural requirements under state law. Yet it fails to meet the juristic criteria of moral agency required in Islamic jurisprudence. It has no عقل, no نية, and no enduring liability. Still, it stands at the center of contracts that demand precisely these attributes. Scholarly critiques have therefore questioned whether such artificial personhood can be reconciled with Shari’ah foundations at all (https://www.academia.edu/113834504/Legal_Personality_in-Islamic_Jurisprudence).
Therefore, before assessing products, contracts, or Shari’ah board approvals, one must confront this mismatch directly. Islamic jurisprudence recognizes economic actors through human responsibility, not legal fiction. As a result, the question of Islamic banks as artificial persons becomes unavoidable. Can an entity without real agency fulfill a system built on moral accountability?
This benchmark will guide the analysis ahead. Each justification offered for Islamic banking artificial legal entity status must be tested against these juristic foundations, not against the conveniences of modern corporate law.
Islamic bank as artificial person and the Waqf analogy
Why this analogy is central to the debate
Supporters of Islamic banking often argue that an Islamic bank as artificial person resembles classical institutions such as Waqf and Bait-ul-Maal. According to this view, since these institutions operated without being tied to a single natural person, Islamic jurisprudence implicitly recognizes artificial legal entities. Consequently, modern Islamic banks are presented as a continuation of this tradition.
This analogy plays a pivotal role because it attempts to anchor corporate personhood in Islamic history. If the analogy fails, the foundation for treating Islamic banks as artificial persons collapses at an early stage.
Why Waqf does not support the verdict of Islamic Bank as Artificial person
At first glance, Waqf appears institution-like. It owns property, generates income, and serves beneficiaries. However, Islamic jurisprudence treats Waqf very differently from a corporate entity. A Waqf does not exist to conduct commercial business for profit distribution. Its purpose is perpetual public or charitable benefit, not capital accumulation for shareholders.
More importantly, ownership in Waqf does not belong to individuals in a transferable or claimable sense. No shareholder exists. No investor holds residual rights. Beneficiaries possess only usufruct rights, not ownership rights. Classical jurists emphasize this distinction clearly, as Waqf property cannot be sold, inherited, or liquidated for private gain (https://islamqa.info/en/answers/20073/waqf-in-islam).
By contrast, Islamic banks as artificial persons operate as profit-seeking entities. Their assets belong to shareholders. These assets can be sold, inherited, pledged, or liquidated. In the event of insolvency, remaining value flows back to investors. This structure directly contradicts the juristic logic governing Waqf.
Liability and accountability differences
The analogy further fails on the question of liability. Waqf does not incur commercial debt in the ordinary sense. Since it does not engage in speculative or profit-maximizing activity, insolvency has no juristic meaning within its framework. The mutawalli serves as a trustee, not a profit-seeking manager. He does not receive profit shares, nor does he insulate himself from accountability through institutional form.
Islamic banks as artificial persons function in the opposite manner. Directors receive salaries, bonuses, and profit shares simultaneously. Meanwhile, liability remains structurally capped. When losses exceed assets, dissolution legally terminates responsibility. Islamic jurisprudence does not recognize such an exit mechanism for trustees or economic actors entrusted with others’ wealth.
Why this constitutes false analogy
Islamic jurisprudence treats analogy as valid only when underlying causes align. In this case, the causes diverge sharply. Waqf exists to remove property from private circulation. Islamic banks exist to mobilize private capital for profit. Waqf suspends ownership for ethical permanence. Islamic banks concentrate ownership for financial return.
Therefore, equating Islamic banks as artificial persons with Waqf constitutes qiyās maʿa al-fāriq, an analogy between fundamentally dissimilar entities. Juristic form cannot be borrowed while ignoring juristic purpose. When purpose diverges, legal resemblance dissolves.
As a result, the Waqf analogy fails to establish any Shari’ah basis for corporate personhood in Islamic banking. Instead, it highlights the structural distance between classical Islamic institutions and modern banking entities.
Bait-ul-Maal, inheritance under debt, and the limits of analogy
Why these arguments are advanced
After invoking Waqf, defenders of Islamic banking often turn to Bait-ul-Maal and the concept of inheritance under debt to justify Islamic banks as artificial persons. The claim follows a similar pattern. Since these institutions or situations appear to function beyond individual persons, they are presented as precedents for corporate legal personality within Islamic jurisprudence.
This move attempts to widen the evidentiary base. If Islamic law tolerated responsibility being attached to an institution or estate rather than a living person, then modern banking entities might claim indirect legitimacy.
Why Bait-ul-Maal cannot justify the presence of Islamic Bank as artificial person
Bait-ul-Maal occupies a unique position in Islamic governance. It represents public wealth held in trust by the Islamic state for collective welfare. Jurists consistently treat it as a treasury, not as a market participant. It does not operate to generate private profit, nor does it distribute returns to investors. Its expenditures serve defined public purposes such as social welfare, defense, and administration.
Crucially, Bait-ul-Maal does not insulate individuals from liability. Officials managing it act as trustees. If they misuse funds, responsibility attaches directly to them. No juristic doctrine allows an administrator to hide behind the treasury’s existence to escape accountability. Classical discussions of public finance make this trustee relationship explicit (https://www.islamicfinance.com/2016/05/baitul-maal-the-public-treasury-in-islam/).
An Islamic bank as artificial person operates on entirely different principles. It pursues profit, distributes returns to shareholders, and limits the personal liability of directors and owners. Bait-ul-Maal does none of these things. Therefore, similarity in administrative form does not translate into similarity in legal essence.
Inheritance under debt and personal liability
The second argument relies on the concept of inheritance under debt. In Islamic law, when a person dies indebted, his estate becomes encumbered by that debt. Creditors may claim repayment from the inherited property before distribution to heirs. Some writers interpret this situation as evidence that property itself can act as a debtor, independent of the deceased person.
This interpretation misreads the juristic position. Islamic jurisprudence treats debt as a personal obligation that survives death in moral terms. Repayment from the estate does not transfer liability from the deceased to the property. Instead, the estate serves as the means of settlement. If debts remain unpaid, the deceased remains accountable in the Hereafter, a principle emphasized in Prophetic traditions and juristic commentary (https://www.islamweb.net/en/fatwa/86630).
Therefore, an Islamic bank as artificial person illustrates the opposite problem: it assumes autonomy and limited liability for economic activity, whereas Islamic law never transforms property into an autonomous legal person. The moral subject of obligation remains the human being, whether alive or deceased. The estate functions as an instrument of settlement, not as a bearer of independent responsibility.
Why these analogies fail together
Both Bait-ul-Maal and inheritance under debt share a critical feature. Neither creates an entity that earns profit while shedding liability. Neither allows dissolution to terminate responsibility. Neither separates gain from moral accountability. These features define modern corporate personhood.
Consequently, using these concepts to legitimize Islamic banks as artificial persons stretches analogy beyond juristic limits. Islamic jurisprudence permits institutional administration, but it does not permit institutional immunity. Responsibility always traces back to real persons.
This distinction matters. Once liability is detached from human actors and assigned to an artificial entity, the ethical core of Islamic commercial law weakens. At that point, the analogy ceases to serve jurisprudence and begins to serve convenience.
Zakat on joint ventures and the illusion of artifical person
Why zakat is used as supporting evidence
Another argument advanced to justify Islamic banks as artificial persons relies on the treatment of zakat in joint ventures. Proponents claim that since zakat is assessed on the collective wealth of a partnership rather than on each individual share separately, Islamic law implicitly recognizes a collective entity that functions like a legal person.
This argument appears attractive because zakat represents a clear and enforceable financial obligation in Islamic law. If collective wealth attracts collective obligation, then the existence of a collective economic actor seems plausible at first glance.
Why collective zakat does not create a legal person
Islamic jurisprudence treats joint ventures as associations of real persons, not as independent moral or legal beings. When jurists discuss zakat on jointly owned assets, they do not assign obligation to an abstract entity. Instead, they simplify assessment for practical administration. Liability remains traceable to individual owners in proportion to their ownership.
The joint assessment of zakat serves efficiency, not ontological transformation. It does not convert the partnership into a bearer of independent responsibility. Each partner remains personally obligated before Allah, even when calculation occurs collectively. Juristic texts consistently emphasize that zakat obligation rests on ownership, not on institutional form.
By contrast, Islamic banks as artificial persons do not merely pool assessment. They absorb obligation. The bank, not the shareholder, appears as the responsible party in legal and financial terms. This shift changes the nature of accountability entirely.
Taxation, zakat, and category error
The argument further weakens when examined against modern taxation practice. Companies pay taxes as legal persons. Zakat, however, does not operate as a state-imposed fiscal tool. It functions as a divine obligation linked to moral ownership. Islamic jurisprudence never equated zakat with taxation, nor did it allow zakat to substitute for state levies.
Modern Islamic banks operate squarely within tax regimes. They do not discharge zakat obligations as institutions in place of shareholders. Instead, zakat remains either individualized or neglected altogether. Using collective zakat assessment as proof of corporate personhood therefore commits a category error. It conflates administrative convenience with legal essence.
Why this analogy fails structurally
The joint venture analogy fails because it confuses aggregation with abstraction. Islamic law allows aggregation of assets for ease of calculation. It does not permit abstraction of responsibility away from human owners. Once responsibility detaches from persons and attaches to an artificial entity, the juristic logic of zakat collapses.
Therefore, zakat on joint ventures does not support the claim that Islamic banks as artificial persons possess legitimacy under Islamic jurisprudence. Instead, it reinforces the opposite conclusion. Islamic law insists that financial obligation remains anchored in real ownership and real persons.
This conclusion strengthens the cumulative case. Each analogy offered to justify artificial personhood relies on surface resemblance while ignoring juristic substance. With zakat, as with Waqf and Bait-ul-Maal, the difference lies not in form but in purpose and accountability.
Islamic bank as artificial person in Mudarabah operations
Why operational structure matters
Up to this point, the discussion has examined whether Islamic jurisprudence recognizes Islamic banks as artificial persons in principle. However, legitimacy cannot rest on theory alone. It must also survive contact with actual practice. For this reason, the operational role of Islamic banks in mudarabah arrangements requires close scrutiny.
An Islamic bank as artificial person typically occupies a central position between depositors and entrepreneurs. It collects funds from depositors under mudarabah-based investment accounts and then deploys these funds by entering separate financing arrangements with business clients. At first glance, this structure appears compliant. On closer examination, however, it reveals deep juristic inconsistencies that have already been documented in detail, particularly regarding mudarabah ki khilaf warziyan in contemporary Islamic banking practice (https://economiclens.org/mudarabah-ki-khilaf-warziyan/).
The problem of dual and shifting roles
In classical Islamic jurisprudence, mudarabah assigns clear roles. One party provides capital as rabb al-māl. The other provides labor and expertise as mudarib. Profit is shared according to agreement. Loss, however, falls on capital unless misconduct or negligence occurs. These roles do not overlap. They also do not shift midstream.
Islamic banks as artificial persons disrupt this clarity. In their relationship with depositors, banks present themselves as mudarib. In their relationship with entrepreneurs, they present themselves as capital providers. As a result, the bank simultaneously claims two opposing roles within linked transactions. This dual positioning lacks precedent in classical fiqh and has been critically examined in analyses questioning whether Islamic banks operate in mudarabah in name or in practice (https://economiclens.org/mudarabah-in-name-or-in-practice-the-reality-of-islamic-banks/).
If the bank truly acts as a mudarib, it must contribute effort, expertise, and operational risk. Mere intermediation and documentation do not satisfy this requirement. Conversely, if the bank acts as a capital owner, then payments made to depositors resemble returns on loans rather than profit sharing. Islamic jurisprudence does not recognize profit entitlement on loans, regardless of labeling.
Agency without accountability
Some defenders argue that Islamic banks function as agents rather than principals. However, agency in Islamic law does not justify profit entitlement beyond agreed fees. An agent earns ujrah, not a share of profit. Yet Islamic banks as artificial persons claim profit, management fees, and performance incentives simultaneously. This combination contradicts the juristic separation between agency and partnership.
Moreover, agency does not eliminate liability. The agent remains accountable for misconduct and breach of trust. In contrast, corporate form allows liability to remain confined within the artificial entity. When losses escalate, dissolution terminates responsibility. Islamic jurisprudence does not recognize such an escape mechanism for mudarib or agent alike.
Violation of risk–reward symmetry
Islamic commercial law rests on a core principle. Entitlement to gain must correspond to exposure to loss. This rule, articulated through well-known juristic maxims, prevents extraction of return without responsibility. Islamic banks as artificial persons undermine this symmetry. They earn profit while limiting liability through corporate insulation.
As a result, the bank secures upside participation while capping downside exposure. Depositors bear losses indirectly. Entrepreneurs bear operational risk directly. The artificial entity absorbs neither fully. This imbalance contradicts the foundations of mudarabah and partnership in Islamic jurisprudence, a point widely discussed in critical Islamic finance literature (https://www.academia.edu/358287635).
Why operational reality strengthens the critique
Once operational mechanics are examined, the earlier theoretical critique gains force. Islamic banks as artificial persons do not merely lack historical precedent. They also fail to perform any single recognized Islamic contractual role with consistency. Their structure depends on role ambiguity combined with legal insulation.
Therefore, even if one were to overlook the absence of juristic foundations for artificial personhood, the practical conduct of Islamic banking would still remain problematic. The institution neither behaves as a true mudarib nor as a transparent capital owner. Instead, it operates through a layered legal fiction sustained by corporate law.
Limited liability and the erosion of responsibility in Islamic law
Why limited liability sits at the core of the problem
The defining feature that enables Islamic banks as artificial persons to operate without full accountability is limited liability. This feature does not merely shape risk exposure. It reshapes moral responsibility itself. Therefore, any serious Shari’ah assessment must address limited liability directly rather than treating it as a neutral legal convenience.
In Islamic jurisprudence, liability follows ownership and action. When a person enters a contract, responsibility does not disappear because loss becomes inconvenient. Debt remains attached to the debtor until repayment or forgiveness occurs. Neither time nor insolvency dissolves moral obligation. This continuity distinguishes Islamic commercial law from systems that allow procedural exit from responsibility.
Why mudarabah does not justify limited liability
Defenders of Islamic banking often argue that mudarabah inherently limits liability. They claim that the capital provider risks only invested capital, while the mudarib risks only effort. This claim requires careful qualification. In classical fiqh, limited loss does not mean limited liability. The capital provider bears financial loss, but debt incurred through misconduct, negligence, or unauthorized borrowing remains fully enforceable.
Moreover, if the mudarib borrows on behalf of the venture with permission, the capital owner assumes responsibility. If borrowing occurs without permission, the mudarib bears full personal liability. Islamic jurisprudence does not recognize a scenario where both parties escape liability while profit continues to flow.
Islamic banks as artificial persons invert this logic. Depositors, banks, and directors all enjoy capped exposure through contractual drafting and prospectuses. When losses exceed assets, creditors face an institutional wall. Islamic law does not validate such collective insulation from obligation.
Debt, insolvency, and moral continuity
In Islamic jurisprudence, debt occupies a special status. Insolvency may delay enforcement, but it does not extinguish obligation. The Qur’an commands ease for the insolvent, not erasure of responsibility. Classical jurists consistently maintain that liability persists even when repayment becomes temporarily impossible.
Limited liability disrupts this principle. It allows an artificial entity to accumulate debt, distribute profit during success, and then terminate existence during failure. Creditors lose claims not because debt vanished, but because the debtor vanished legally. This mechanism has no equivalent in Islamic jurisprudence.
Why analogy with classical exceptions fails
Some writers attempt to justify limited liability by invoking exceptional cases such as authorized slaves or constrained partners. These cases do not support the claim. In each instance, liability ultimately traces back to a living person. Restrictions apply to enforcement, not to moral responsibility itself. The debtor remains identifiable. Obligation remains intact.
Islamic banks as artificial persons differ fundamentally. The entity that incurs obligation dissolves by design. No living person carries residual responsibility. This outcome contradicts the Islamic insistence that liability cannot be manufactured away through form.
Structural consequences for Islamic finance
Once limited liability is accepted without qualification, the ethical structure of Islamic finance weakens. Profit becomes detachable from risk. Control becomes detachable from responsibility. Directors and shareholders benefit from success while avoiding personal exposure during failure.
This arrangement may function efficiently under corporate law. However, efficiency does not confer Shari’ah legitimacy. Islamic commercial law prioritizes justice, transparency, and accountability over convenience. Limited liability, as currently embedded in Islamic banking, undermines these priorities.
Therefore, the problem is not accidental. It is structural. Islamic banks as artificial persons rely on limited liability to survive. Yet this reliance places them in persistent tension with the moral logic of Islamic jurisprudence.
Islamic banks as artificial persons: Juristic verdict and viable alternatives
What the cumulative analysis establishes
The preceding sections lead to a clear and unavoidable conclusion. Islamic banks as artificial persons do not derive legitimacy from Islamic jurisprudence. Each attempt to justify their existence relies on analogy rather than textual or juristic grounding. Waqf, Bait-ul-Maal, inheritance under debt, and zakat on joint ventures all fail to support corporate personhood when examined at the level of legal substance rather than surface resemblance.
More importantly, the operational reality of Islamic banking reinforces this conclusion. Islamic banks neither function as genuine mudarib nor as transparent capital owners. Instead, they occupy shifting roles that allow profit extraction while limiting liability. Corporate insulation enables this arrangement. Without limited liability, the structure would collapse.
Islamic jurisprudence does not recognize institutions that earn profit while dissolving responsibility. Liability in Islamic law does not end with insolvency, procedural exit, or legal liquidation. It persists until settlement or forgiveness. Artificial personhood breaks this continuity by design.
Why Shari’ah boards and product compliance are insufficient
Much of contemporary Islamic finance focuses on product-level compliance. Murabaha replaces interest with markup. Ijarah replaces loans with leases. Documentation changes, while structure remains intact. This pattern reflects a broader phenomenon in which Islamic banking appears interest-free in name rather than in practice, while preserving the same institutional and risk structure of conventional finance (https://economiclens.org/interest-free-in-name-or-in-practice-the-reality-of-islamic-banking/). However, juristic legitimacy cannot be achieved by adjusting contractual labels while preserving an invalid foundation.
If the economic actor itself fails to satisfy Shari’ah requirements, no amount of contractual refinement can cure the defect. Islamic banks as artificial persons suffer from this foundational flaw. Their legal existence rests on corporate law, not Islamic jurisprudence. Their liability framework contradicts Islamic principles of responsibility. Their profit entitlement lacks consistent juristic justification.
Therefore, Shari’ah board approvals and regulatory endorsements do not resolve the core issue. They operate downstream of a problem that originates upstream.
A constructive alternative: Islamic investment institutions
This critique does not reject Islamic finance. It rejects a specific institutional form. Islamic jurisprudence fully supports investment activity through recognized contracts such as mudarabah and musharakah when conducted between real persons who bear real responsibility.
A viable alternative lies in Islamic investment institutions that operate without artificial personhood insulation. These entities would function as transparent partnerships or agency-based investment units. Managers would earn fees or profit shares consistent with their role. Liability would remain traceable. Risk and reward would align. Dissolution would not erase responsibility.
Such institutions may appear less convenient than modern banks. However, convenience has never served as a criterion of Shari’ah legitimacy. Islamic law prioritizes justice over scalability and accountability over efficiency.
Final assessment
Islamic bank as artificial person represent a structural compromise rather than a juristic evolution. They borrow the corporate shell of conventional banking while attempting to infuse it with Islamic terminology. This approach produces legal continuity but juristic contradiction.
A serious commitment to Islamic finance requires more than product innovation. It requires institutional honesty. Until Islamic banking confronts the problem of artificial personhood and limited liability directly, claims of Shari’ah compliance will remain incomplete.
The choice is therefore clear. Islamic finance must either accept the corporate form with its ethical consequences or rebuild its institutions on foundations that Islamic jurisprudence actually recognizes. The path forward demands clarity, not camouflage.
